As commodity and share prices surge, where does uranium go from here?

by Greg Klein

A sharp climb in the commodity price accompanied by a dramatic rally in stock prices—is this the renaissance uranium-watchers have been waiting for? The metal’s spot price indicator started picking up last summer, but with no real effect on share prices. Then suddenly last week uranium climbed steeply, coinciding with sharp gains for both miners and explorers. Significantly, the commodity’s elevation preceded the November 7 news about Japanese nuclear reactor restarts.

The events provided opportune timing for the November 14 (Down Under time) Paladin Energy TSX:PDN quarterly conference call, with its usual forecasts from managing director/CEO John Borshoff.

Hardly a voice crying in the wilderness, Borshoff has been one of many predicting a steep price hike for uranium. Back in August 2013, for example, he argued that to meet demand prices need to rise two or three years ahead of an anticipated 2016 uranium shortfall. “Price hikes will be severe,” he stressed. “Why this is not worrying the hell out of the utilities completely astounds me.”

Now, he says, “The door to the pre-Fukushima period is at long last starting to open. And those supply shortages that I have for so long been talking about will now start becoming the real issue and the fundamental catalyst driving price increases.”

Uranium began recuperating from its $28 low in early August. In late October, Cameco Corp TSX:CCO president/CEO Tim Gitzel noted the spot price indicator’s increase of about 25%. “We believe the move was largely due to trading activity and market speculation around unforeseen events like the potential impact of Russian sanctions, possible disruption in the U.S. Department of Energy inventory disposition and the labour disruption at our own McArthur River and Key Lake operations,” he said. “We’ll have to wait and see if the increase is sustainable but it has remained relatively stable thus far.”

Borshoff agrees about the trading activity. But he points out that the Cameco strike settled quickly and the potential UN sanctions against Russia never happened. Even so, prices continued to rise. In fact uranium’s trajectory entered a second, steeper phase, quickly rising from about $37 to $42 a pound. That indicates ever-increased trading that’s exposing weak supply, he says.

Nor does he agree with observers who “say that because the term market price has not similarly responded, there is a shallowness in this price recovery.” Borshoff concedes that spot volumes have already tripled those of 2013 with little effect on longer-term contracts. But he predicts additional term contracting over the next six to 12 months will start “testing those shortages we see from our own studies occurring in the post-2016 period.”

The irony is even these price rises will be totally insufficient to incentivize new uranium start-ups to accommodate the extraordinary growth that is needed in supply…. With each year that the building of new mines is delayed, the greater will be the price reaction. This is inevitable.—John Borshoff, managing director/CEO of Paladin Energy

As a result, Borshoff expects term prices to react later this year or during 2015. “The irony is even these price rises will be totally insufficient to incentivize new uranium start-ups to accommodate the extraordinary growth that is needed in supply….” he maintains. “With each year that the building of new mines is delayed, the greater will be the price reaction. This is inevitable.”

Reduced output has already started to take its toll on spot and term prices, Borshoff adds. Paladin’s Kayelekera mine in Malawi and Uranium One’s Honeymoon mine in South Australia have gone on care and maintenance. Production cuts hit Rio Tinto’s (NYE:RIO) majority-held Rossing mine in Namibia as well as American in-situ recovery operations. Kazakhstan’s growth in output, meanwhile, will fall below 2% this year. Paladin sees 2014 global production dropping from 154 million pounds in 2013 to 148 million pounds or less this year.

Additionally, another four million pounds has moved from the spot to term market, Borshoff says. As for this year’s spot market volume of 45 to 50 million pounds, “in our estimate, much of this volume is churn and it is probably only about 25 to 30 million pounds of primary production feeding this important market.” That would indicate a reduction of 40% to 50% in the uranium available to the spot market, Borshoff says.

David Talbot was among others who emphasized that uranium’s sharp increase preceded the latest announcement from Japan. “It is the utilities that are starting to enter the market, suggesting that this rally could have some sustainability,” the Dundee Capital Markets analyst stated in a November 7 note to investors.

Like Borshoff, he added, “We have always said, just like in 2006-2007, when contracting begins and the price moves, it will move fast.”

Talbot went further, however, predicting a “likely rally” in equities. Events so far have proven him right. The same day, several uranium miners and explorers saw their shares take off by at least 20%, some even surpassing 50%, before settling back a bit on November 12 or 13.